On-Line Quiz

Note: There are 10 multiple choice questions below. Answer each question by clicking the
appropriate button. When you have answered all of the questions, click the "Check Answers" button
at the bottom of the page. Your score will be calculated, and you will see a list of the questions
that you answered correctly, and those that you answered incorrectly. You may retake the quiz as
often as you wish. Click the "Reset" button to clear all your answers before you retake the quiz.

The purpose of a financial sector is:

to minimize the payments firms make to state and local governments.
to maximize the payments firms make to state and local governments.
to channel funds away from households and firms with surplus funds.
to channel monies into socially acceptable causes.

Suppose you have money to lend, but will do so only if you are compensated for the risk of default. If you set a
high interest rate on your loan, a likely consequence is that ________.

safe borrowers will look elsewhere, and only risky borrowers will find your terms attractive
risky borrowers will look elsewhere, so your money is more likely to go to a safe borrower
competition from other lenders will force you to lower your interest rate
you will be prosecuted for predatory lending

Providers of health care insurance require applicants to provide information on their medical history. The
purpose may be to minimize which of the following problems?

moral hazard.
adverse selection.
government taxes.
opportunity cost.

Commercial banks limit the adverse selection problem through:

monitoring.
restrictive covenants.
screening.
moral hazard.

When property rights are well defined and inexpensive to enforce, ________.

collateral is an efficient solution to asymmetric information problems
little or no collateral is needed to secure a loan
banks become less dominant among intermediaries
poor borrowers are at no disadvantage relative to wealthy borrowers

The tyranny of collateral:

suggests that government tax rates are too high in the United States.
gives rise to the twin problems of moral hazard and adverse selection.
implies that when a poor person has a good idea they find it difficult to acquire financing.
attributes moral hazard to excessive government regulation